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Interest in Geothermal Heating Up

Up and down the Pacific Coast of the Americas and in the Eastern Caribbean—along the region’s volcanic arcs and shifting tectonic plates—geothermal resources hold the potential to provide a steady supply of renewable energy. Mexico and several Central American countries already generate some of their electricity from geothermal power, and last year Chile opened what is still the only geothermal plant in operation in South America. Meanwhile, several other countries from the Andes to the Caribbean are in various stages of exploration or drilling.

The main appeal of geothermal energy is that it is both renewable and reliable—a source of baseload power that does not depend on fossil fuels. Because it harnesses heat from deep in the earth’s crust, it works regardless of the climate conditions on the surface, whether sun or wind or rain.

The main drawback is that geothermal exploration can take many years and a lot of money, with no guarantee of success. But these days, green financing is mitigating some of the upfront risks and making this source of energy more attractive to investors.

Here’s a quick overview of geothermal development in Latin America and the Caribbean:

Mexico leads the way in the region, with 936 megawatts (MW) of installed capacity—seventh in the world. (The United States tops the global list, followed by the Philippines, Indonesia, Turkey, New Zealand, and Italy.)

Five Central American countries currently produce geothermal power, according to the International Renewable Energy Agency (IRENA). Three of them already have significant installed capacity—Costa Rica (207 MW), El Salvador (204 MW), and Nicaragua (155 MW)—followed by Guatemala (49 MW) and Honduras (35 MW).

Additional geothermal development is underway throughout much of Central America. Costa Rica, for example, plans to bring an additional 55 MW of capacity on line in early 2019.

In El Salvador, geothermal accounts for just over 10 percent of total installed energy capacity but last year supplied almost one quarter of the country’s electricity—23 percent. A 2016 IRENA report said El Salvador has the world’s second largest share of geothermal generation after Iceland.

Chile started producing geothermal energy last year. The 48 MW Cerro Pabellón plant—located in the northern part of the country, in an area surrounded by volcanoes—so far is the only geothermal operation in South America. It is also the highest such plant anywhere in the world, at some 4,500 meters above sea level.

Ecuador, Bolivia, Peru, and Argentina are all exploring their geothermal potential and in some cases have announced tenders for specific projects.

Among the Eastern Caribbean countries, Dominica is the furthest along in geothermal development, with construction of a 7 MW plant scheduled to start later this year or in early 2019. The first drilling in Saint Vincent and the Grenadines is expected early next year.

For the Caribbean countries with viable geothermal resources—these include Grenada, Saint Kitts and Nevis, Saint Lucia, and Montserrat—this source of energy has the potential to be a competitive alternative to diesel for generating electricity, according to Tessa Williams-Robertson, Head of the Renewable Energy/Energy Efficiency Unit at the Caribbean Development Bank (CDB).

“We expect it to be a transformative development,” she said. Of course, she added, getting a geothermal project going is “an expensive proposition”—especially in small, isolated markets. “There is a need to bring concessional resources to the table both to mitigate risk as well as to reduce the cost to the final consumer,” she said in a telephone interview.

The CDB is working with several partners—including the Inter-American Development Bank (IDB), through its Sustainable Energy Facility for the Eastern Caribbean; the European Union, through its Caribbean Investment Facility; and the governments of New Zealand and the United Kingdom—to support geothermal activity in several countries. The World Bank, meanwhile, is taking the lead in Dominica and Saint Lucia. Other organizations, including the Clinton Climate Initiative, are providing support at critical stages.

“We’re all trying to work together to make this happen,” Williams-Robertson said. Grant resources, she noted, have made it possible to provide early technical and legal support so that countries have the capacity they need to develop environmental and social impact statements, for example, and negotiate energy agreements with private partners.

Reducing Investment Risk

In the Caribbean and elsewhere in the Americas, concessional financing from major international climate funds is reducing investment risk and making geothermal projects more viable. A typical financing mechanism makes “contingent grants” available to support energy exploration. If the exploratory drilling is successful, the financing turns into a loan, with a grace period that allows time to put the project into production. If the wells are a bust, the financing is considered a grant and doesn’t have to be repaid.

Mexico launched a financing mechanism of this type in July, at the 5th Geothermal Congress for Latin America and the Caribbean (GEOLAC 2018), held in Mexico City. The mechanism, which will be implemented by the IDB, will offer more than $50 million in financing from the Clean Technology Fund, to spur exploratory drilling in certain geothermal zones in Mexico.

Geothermal is a key component of Mexico’s gradual transition to renewable energy sources, and the country hopes to add 750 MW of capacity by 2030, said Michelle Ramírez, Director of Geothermal at Mexico’s Ministry of Energy (SENER). While current low prices for solar and wind energy can make it tough for geothermal to compete, well-designed financing mechanisms help make many projects feasible, she said.

Mexico’s abundant resources make geothermal energy development a logical, strategic way to expand baseload capacity, according to Ramírez. Although solar and wind do not yet have enough penetration in the electricity grid to worry about the intermittent nature of these resources, she said, eventually that may change.

“Before you have intermittency problems, you have to start to invest in geothermal projects,” Ramírez said in an interview, noting that geothermal projects can take six years or more to come to fruition. “It’s a matter of energy security. It’s a matter of strategic policy. And it’s also a matter of public policy,” she said.

Mexico has been laying the groundwork for geothermal expansion for several years. In 2014, it enacted the Geothermal Energy Law, which put a priority on developing this type of energy resource and established a clear legal framework for the industry.

Once the exclusive province of the Federal Electricity Commission, geothermal development is now open to the private sector. Four years ago, Mexico established the Mexican Center for Innovation in Geothermal Energy (known as CeMEIGeo) to bring together business representatives and members of the academic community to promote and accelerate geothermal development in the country.

A Dialogue on Geothermal

In Chile, the Ministry of Energy convened an 18-month dialogue process—the Geothermal Roundtable—that brought together representatives of the private and public sector, along with academic and research institutions, to analyze the country’s geothermal prospects. The final report, which was issued last month, looks at various scenarios for development and capital investment, and estimates that potential capacity could be as high as 3,800 MW. The medium-range estimate of capacity that could be developed in the coming years: around 600 MW by 2030 and another 1,500 MW by 2050.

The report’s proposals, while not binding, will provide input to the government’s future energy plans, according to Gabriel Prudencia, Head of the Renewable Energy Division in Chile’s Ministry of Energy.

Today, geothermal represents a miniscule portion of electricity generation in Chile—0.1 percent in 2017, according to figures provided by Prudencia. And despite the “immense potential,” current conditions in the country’s highly competitive, private-sector market for renewable energy “have without question raised certain challenges for geothermal projects,” Prudencia said in an interview. However, he added, market conditions are always changing.

Prudencia did stress that geothermal is not the only clean-energy solution to baseload energy. Energy storage systems are worth exploring further, he said, along with demand management and grid connections to neighboring countries.

El Salvador, for its part, plans to continue moving full steam ahead with geothermal and is drilling exploratory wells in a third geographical site in the country. Unlike in Chile, geothermal energy development is the responsibility of a state-run company, LaGeo.

The geothermal industry got its start in the country in the 1970s with Japanese technology, and in the intervening years El Salvador has developed extensive technical capacity of its own, according to José Luis Regalado, who oversees electricity operations in the Salvadorian agency that manages electricity and telecommunications (SIGET). In fact, he added, El Salvador now runs a training center on geothermal energy for participants from other countries in Latin America.

El Salvador has good systems in place for the entire geothermal process, including drilling exploratory wells, monitoring production and reinjection wells, and maintaining the steam production rate, Regalado said. Geothermal, he said, “is perhaps the resource in greatest abundance and the natural resource that we know best.”